In 2002, Anne Krueger, First Deputy Managing Director of the International Monetary Fund (IMF), floated the idea that countries can go bust, advanced her opinion about a possible international mechanism of sovereign debt restructuring, and when considering the obstacles to an orderly debt restructuring, explicitly mentioned the behaviour of vulture funds in the following terms[i]:
Another obstacle to orderly restructuring has been the growing threat of legal action […] A second reason is that litigants have recently overcome one of traditional barriers to suing debtor governments, namely the difficulty of locating and seizing their assets. In one recent case, for example, a “vulture fund” in effect held Peru to ransom by persuading courts in the US and Europe to prevent it servicing its debts to other creditors. It is not clear whether this technique would survive legal challenge in future cases, but it only goes to highlight a more general problem.
That “vulture fund” which held Peru to ransom, is the same fund that now pursues and holds Argentina to ransom.
According to the website of the American Task Force Argentina (ATFA)[ii] –which nowadays applauds the pressures on Argentina– one of its members and supporters is Elliot Associates Inc., which indicates that AFTA is not just a lobby and pressure group, more or less questionable, just like any other, but it is the lobby group of a vulture fund.
Elliott Associates vs. Peru
To say that Elliot Associates Inc. is a vulture fund that blackmails the countries chosen as its preys is not just a mere opinion, but a fact. Argentina has no need to prove it, as the IMF has already said that.
Anne Krueger is not the only one that has condemned Elliot Associates. The IMF had published in 2001 a document prepared by the Policy Development and Review and Legal Departments, about the private sector participation in the financial crisis resolution and the sovereign debt restructuring which summarized the Elliot case against Peru as follows[iii]:
Box 2.6. Elliott Associates vs. The Republic of Peru The recent success of the litigation strategy employed by a distressed debt purchaser against Peru may have the effect of encouraging creditors to hold out in future debt restructurings. In effect, the debt purchaser in question was able to pressure Peru into satisfying its claim in full by taking legal measures that almost forced Peru to default on its Brady bonds.
In October 1995, Peru announced a Brady restructuring in the context of a Fund-supported program (and used Fund resources to help finance the acquisition of collateral for the new instruments). While most bank creditors tendered their claims for the exchange, a few creditors with relatively small exposure decided to hold out for better terms. Some 18 months after Peruannounced the Brady deal, a vulture creditors called Elliot Associated purchased US$20.7 million of commercial loans that had been guaranteed by Peru. Unlike most other creditors, Elliott did not accept Brady bonds in exchange for Peruvian debt. Rather than participate in this restructuring, Elliott held out and on its own behalf filed a lawsuit in New York for recovery of the full face value plus interest on the loans that it held. After several proceedings, Elliott in June 2000 obtained a judgment against Peru for US$56 million and an attachment order against Peru’s assets that were used for commercial activity in the United States.
Elliott was tenacious in seeking to enforce its judgment. One of its targets was the interest payments due to be paid by Peru to its Brady bondholders. First, Elliott sought to attach the Brady interest payments at the level of Chase Manhattan, the New York fiscal agent under the Brady bonds. Elliott successfully obtained a restraining order against Chase Manhattan from making payments, arguing that the cash was still the property of Peru and was thus subject to attachment to satisfy Elliott’s claim. Second, Elliott sought to capture payment at the level of the clearing house, Euroclear, in Brussels. Elliott successfully obtained an order in the Brussels court restraining Euroclear from accepting payment or paying out cash from Peru to pay the interest due on the Brady bonds. Elliott obtained this order without the defendants Euroclear and Peru being given an opportunity to present their counter-arguments. One of the arguments used by Elliot was that Peru, by paying its Brady bond creditors rather than Elliott, was violating a clause in the loan agreement held by Elliott, which provided that the loan in question ranked equally with all other external indebtedness (the pari passu clause).
With insufficient time to appeal the orders obtained by Elliott, Peru decided to settle with Elliott in order to avoid default on the Brady bond payments.
The legal bases upon which Elliott litigated its case –particularly its reliance on the pari passu clause– are somewhat controversial. Given the settlement of the case, these legal issues were not definitively determined. However, the Elliott case illustrates the extent to which a creditor can exercise considerable leverage on a debtor by putting the sovereign in a position where it might be forced to default on its payments to other creditors.
In the footnote 8 of this document the IMF points out:
This would be consistent with the classic behavior of so-called vulture creditors. These creditors tend to buy distressed debt at a steep discount and wait until the decks have been cleared through a restructuring before attempting to apply pressure for a favorable settlement, in many cases, through litigation.
Elliot Associates Inc., just as any other vulture fund, has a “line of business”: the purchase of distressed debt, with the intent and for the purpose of bringing an action or proceeding thereon[iv].
Then they wait until the country is unable to pay, defaults on its debt, or offer to restructure its debt with some write-down, and refuse to participate in any government plan to regularize its failure, and claim for the payment of the full face value plus interest on the bonds in American or European courts.
Elliot Campaigning Against Argentina
Elliot bought Argentine bonds with the same modus operandi.
At the same time they lobby in other forums, as now against Argentina, in the American executive and legislative branches, arguing that the country fails to meet towards American citizens and taxpayers, and for their defence request that the U.S. impose penalties on the debtor nation.
Concerning the Argentina case, is likely that among the “bondholders” that did not enter into swaps, there could be retail investors tempted by high interest rates paid by the issuance of Argentine bonds acquired, and probably they did it in good faith, deceived by their bankers or financial operators who persuaded them that it was a highly profitable and low risk operation, since they were sovereign bonds and countries always pay their debts.
But even in the cases of good faith investors, the animus lucrandi prevailed over prudence.
Any investor or saver that faces an investment that is paying 10 or 100 times more than a current market operation, knows that his money is in risk, but greed prevails over risk, so takes the bet.
Following those issuances Argentina defaulted on its debts in 2001, since then it has tried to honour its obligations, by two debt exchange offers, which were accepted by the majority of the bondholders, retailers and wholesalers, who recognized the Argentina efforts to regularize its status, and considered acceptable the terms of the exchange offers.
Considering both swaps together, the first one of 2005 and the second of 2010, about 92.4 percent of holdouts accepted the Argentine offers. As an example, of the 180,000 bondholders who had initiated arbitration against Argentina before the International Centre for Settlement of Investment Disputes (ICSID), about 120,000 entered into the second exchange and with drawal from the arbitration proceedings (Case Abaclat and others)[v].
The percentage of acceptance ruins the vulture funds argument regarding the Argentine “offer” as unacceptable. However, the argument is misleading: because for them each and every offer is “unacceptable”. In the case of the Peruvian debt restructuring all creditors considered it acceptable, but two: Elliot and Pravin Banker (another vulture fund).
According to the first instance ruling of the New York court, in the case Elliot against Peru[vi]:
Of the approximately 180 creditors eligible to take part in Peru’s restructuring, only Elliott and Pravin Banker refused to participate.
As concisely put by Elliott’s president, Paul Singer: “Peru would either . . . pay us in full or be sued.”
Except for those good faith investors mentioned above, the remaining bondholders who put pressure on Argentina are “vulture funds”.
There have been initiatives in the United States to criminalize the operations of vulture and hedge funds, as prohibited practices, meaning criminal, but in vain. On the contrary, some congressmen openly and publicly support those funds; including: Senator Marco Rubio, Senator Mark Kirk, Senator Connie Mark, etc.[vii]
According to New York legislation[viii], it is a crime to buy debt “with the intent and for the purpose of bringing an action or proceeding thereon.” And that is, precisely, one of the Elliot business lines: to buy debt with the aim to proceed thereon.
As incomprehensible as it may seem, Elliot Associates has succeeded so far to evade criminal punishment provided for in regulation, despite its “modus operandi” and its “recidivism”.
In Europe, prohibition and criminalization of such misconduct, is not a fact, except partially in the UK which last year passed a law[ix] to prevent that the vulture funds take advantage of the debt of poorest countries in the world, banning them from collecting on those debts in UK courts, so these ones can no longer hear such claims.
However, vulture funds do not distinguish between rich and poor countries. Meanwhile they have filled their vaults with Greek debt bonds, hoping the country defaults on its debts, or that Europe imposes a mandatory write-down of the Greek debt.
The fact that the vulture funds seek to obtain the full face value of bonds plus considerable interest on debt that they purchased for sheer pennies with the unlawful purpose of bringing actions or proceedings thereon in order to get substantial amounts, much higher than those they paid, is comprehensible, because that is, in fact, their behaviour and their business; such as predators, which do not leave the vigil until eating the remains.
The fact that some American congressmen lobby for vulture funds is extremely regrettable, but incredible though it may seem, it is also understandable—why wouldn’t they lobby for vulture funds and against a foreign country, if they have no qualms of conscience about lobbying for the banking that has plundered the United States economy shattering the American people well-being.
Raúl de Sagastizabal
[i] Should Countries like Argentina be able to Declare Themselves Bankrupt?
A Commentary, By Anne Krueger, First Deputy Managing Director International Monetary Fund, El Pais, January 18, 2002, Appeared in El Pais. Distributed by Los Angeles Times Syndicate International. http://www.imf.org/external/np/vc/2002/011802.htm,
[ii] http://atfa.org/about/; Members, Elliott Associates, L.P.
[iii] Involving the Private Sector in the Resolution of Financial Crises. Restructuring International Sovereign Bonds, Prepared by the Policy Development and Review and Legal Departments, January 11, 2001. http://www.imf.org/external/pubs/ft/series/03/index.htm and http://www.imf.org/external/pubs/ft/series/03/IPS.pdf
[iv] The behaviour and strategy of Elliot in the case against Peru appear in detail at http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19980806_0000406.sny.htm/qx, Ruling of United States District Court for the Southern District of New York, Judge Robert W. Sweet, 6 August 1998.
[v] Paragraphs 691 and others: “All in all, it is common ground between the Parties that out of approximately 180,000 Claimants about 120,000 have purportedly withdrawn”. ICSID Case No. ARB/07/5, Abaclat and others and The Argentine Republic (the so-called “case of the Italian bondholders”). http://italaw.com/documents/AbaclatDecisiononJurisdiction.pdf
[vi] Paragraphs 1 and 5 on page 19 of the ruling mentioned in footnote iv, supra.
[vii]Details about AFTA lobby and letters of some congressmen are posted at http://www.atfa.org/news/ and http://www.atfa.org/congressionalaction/index.shtml
[viii] N.Y. JUD. LAW § 489 : NY Code – Section 489: Purchase of claims by corporations or collection agencies, quoted in the ruling mentioned in footnote iv, supra.
[ix] The Anti-Vulture Law, because of a legal loophole is not applied in the Jersey Island, British dependency located in the English Channel, and where are now migrating vulture funds to file their suits.